^KCHE^N >< M (UBRABIES. © Digitized by the Internet Archive in 2011 with funding from Boston Library Consortium Member Libraries http://www.archive.org/details/whydidwestextend00acem2 HB31 M.415 working paper department of economics WHY DID THE WEST EXTEND THE FRANCHISE? DEMOCRACY, INEQUALITY AND GROWTH IN HISTORICAL PERSPECTIVE Daron Acemoglu James Robinson No. 97-23 November 1997 , massachusetts institute of technology 50 memorial drive Cambridge, mass. 02139 WORKING PAPER DEPARTMENT OF ECONOMICS WHY DID THE WEST EXTEND THE FRANCHISE? DEMOCRACY, INEQUALITY AND GROWTH IN HISTORICAL PERSPECTIVE Daron Acemoglu James Robinson No. 97-23 November 1997 , MASSACHUSETTS INSTITUTE OF TECHNOLOGY 50 MEMORIAL DRIVE CAMBRIDGE, MASS. 02139 JAN 1 9 1998 UBRABES Why Did the West Extend the Franchise? Democracy, Inequality and Growth in Historical Perspective* James A. Robinson* Daron Acemoglu^ First Version: Revision: August 1996 November 1997 Abstract During the nineteenth century, most Western societies extended the franchise, a decision which led to unprecedented redistributive programs. We argue that these political reforms can be viewed as strategic decisions by political elites to prevent widespread social unrest and revolution. Political transition, rather than redistribution under existing political institutions, occurs because current transfers do not ensure future transfers, while the extension of the franchise changes the future cal equilibrium and acts as a commitment to future redistribution. Our theory politi- offers a novel explanation for the Kuznets curve, whereby the fall in inequality follows redistribution due to democratization. We characterize the conditions under which an economy experiences the development path associated with the Kuznets curve, as opposed to two non-democratic paths; an "autocratic disaster" with high inequality , and low output; and an "East Asian Miracle", with low inequality and high output. Keywords: Democracy, Enfranchisement, Growth, Inequality, Political Commit- ment, Redistribution, Revolution. JEL Classification: D72, 015. * We would like to thank two anonymous referees, Claudia Goldin, Peter Lindert, Torsten Persson, Dani Rodrik, John Roemer, Peter Ternin, Jaume Ventura, Michael Wallerstein and seminar participants at Boston University, Cornell, Harvard, NBER, Universidad de los Andes, Singapore National University and the World Bank for helpful comments and suggestions. t Massachusetts Institute of Technology, Department of Economics, E52-371, 50 Memorial Drive, Cambridge, MA 02142; e-mail: daron@mit.edu t University of Southern California, Department of Economics, Los Angeles, CA 90089; e-mail: arobinsSusc edu. j . Introduction 1 The nineteenth century was a period and unprecedented of fundamental political reform changes in taxation and redistribution. For example, British society was transformed from an "autocracy" run by an The a democracy elite to franchise was extended in 1832, then again in 1867 and 1884, a process which transferred voting rights to portions of the society which did not previously have any political representation. The decades after the political reforms witnessed radical social reforms, increased taxation and the extension of education to the masses. noted by Kuznets, inequality, which had previously been Finally, as increasing, started to decline during this period: the Gini coefficient for in England and Wales had Two 1901. skilled risen from 0.400 in income inequality 1823 to 0.627 in 1871, and fell to 0.443 in key factors in the reduction in inequality were the increase in the proportion of workers (Williamson, 1985), and redistribution towards the poorer segments of the society; for example, taxes rose from 8.12% of National Product in 1867 to 18.8% by 1927, and the progressivity system was increased substantially (Lindert, 1989). During of the tax the late nineteenth and early twentieth centuries, the franchise was also extended in most other Western societies. Those for which data exist (e.g. France, Germany and Sweden) show that democratization was followed by increased redistribution and the downturn of the Kuznets curve. 1 These events are hard to tmderstand with our existing models. likely to lead to increased taxation why should the political power, In particular, elite and redistribution extend the voting rights? (e.g. If democratization is Meltzer and Richard, 1981), Our answer is that the elite, who held were forced to extend the franchise because of the threat of revolution. 2 we argue that democratization alters future political equilibria by changing the identity of the median voter, thus acts as a commitment to future redistribution, and prevents social unrest. In contrast to democratization, the promise by the elite to redistribute in the future while maintaining political power paradoxically, we find that in economies promise of future redistribution 1 A is more is where the masses are credible, and so the not credible. Somewhat politically organized, the elite can avoid a revolution the U.S.. We threat of revolution can intensify either because inequality increases (see for example Muller and country which exhibits a Kuznets curve, but some time after full democratization is return to this case in the concluding section. 2 The on the strongly positive relation between income inequality and because of some unusual event such as wars, depressions and famines. Seligson, 1987, political instability) or without extending the franchise. This may why explain in the nineteenth century, while Britain and France extended the franchise in the face of heightened social unrest and inequality, Germany which had the most organized working class in Europe instituted the much welfare state, but did not extend voting rights until First later (after the turmoil of the World War). The second contribution of our paper and the Kuznets curve. was an important We is between democratization to point out the link argue that the increase in inequality in Western economies which led to the extension of the fran- factor in increased social unrest Democratization, in turn, increased redistribution and was instrumental in reducing chise. inequality. As predicted by our approach, in Britain, France, Germany and Sweden, peak of the Kuznets curve coincides with the extension of the franchise. model explains the Kuznets curve, ture of all it the Although our does not predict that this pattern should be a fea- development processes (which accords with the empirical findings of Anand and Kanbur, 1993; Fields, 1995; and Fields and Jakubsen, 1993). Instead we predict that a Kuznets curve should be observed when a society democratizes due to social pressure. Al- ternative development paths, the "autocratic disaster" and the "East Asian miracle", do not feature Kuznets curves. In an autocratic disaster inequality is high, but there democratization or redistribution because the masses are badly organized. of the masses slows down accumulation and economy leads the of output. In an East Asian miracle initial inequality is is no The poverty to stagnate at a low level low, so the economy accumulates rapidly and converges to a high level of output, and because the gains from growth are more equally shared, reform is social pressure does not until much later, and thus political considerably delayed. Our paper belongs we emerge to the growing literature on political economy and growth. However, are aware of no other paper which shares our two key points: franchise extension as a commitment conflict. device, Among provides the and the Kuznets curve the important contributions related to our work are first elite. who investigate a Our paper (1993) Roemer by social (1985) who economic model of revolution; Grossman (1991;1993;1995), who models predation by the unprivileged against the (1993), as a result of political reform caused is rich; model where there also closely related to is and Ades (1995) and Ades and Verdier concentration of power in the hands of an Benabou (1996), Galor and Zeira (1993), Perotti and Banerjee and Newman (1993) who model investment opportunities as and thus show that distribution of income matters for indivisible growth and development. In fact, our model in Section 3 builds on Galor and Zeira (1993). Finally, our contribution shares a common theme with North and Weingast (1989) who also argue that political reform can be a method of commitment, but in the context of the introduction of the English Parliament in the seventeenth century. The plan power is of the paper is In Section as follows. concentrated in the hands of an elite we develop a model where 2, and the masses can political a revolution to initiate We show that the elite can prevent a revolution either by redistributing, the franchise. We characterize the conditions under which current and contest this power. by extending or promised future redistribution are not commitment 3, to future redistribution, the extension of the franchise, we simplify this model in a number that an increase in inequality can of inequality make in and output of dimensions make we return 4, in our analysis. which a Kuznets curve in this model. A is Model how a Kuznets outline and curve, an autocratic arise along the equilibrium path. In many justify of the assumptions than the U.S.) some extensions. Section 6 concludes. of Democratization consider an infinite horizon economy with a continuum while the remaining — 1 A of agents. A form a rich proportion A of Throughout the , paper superscript p denote poor agent and r will denote rich agent (or poor agents as and all We elite). identical. that if asset, will will treat all Initially, political there There is is full power is 1 identical, "elite" members democracy, the median voter will . member of the of the elite will also be concentrated in the hands of the elite, but A > be a poor agent. h (which should be thought as a combination of human and physical capital). and each member exogenous (so of the elite has we drop time t first is subscripts). a market technology, capital devoted to market production. = We where each poor agent has human capital h rQ > h% > 1. In this section these stocks will be Accumulation There are two methods of producing the The \ so a unique consumption good y with price normalized to unity, and a unique begin our analysis of the economy at time ital. we detected the peak coincides with political reform triggered by these agents are "poor" /iq We show The Environment 2.1 We We also argue in this section that for countries (other social unrest. Section 5 briefly discusses 2 necessary. In Section the revolution a threat, and analyze the dynamics to the historical evidence, We is and thus a firm and add capital accumulation. an East Asian miracle and a revolution may disaster, Section sufficient to stave off a revolution, final is investigated in Section 3. good. Both techniques are linear in cap- Y m = AH™ t The second is where H™ is the amount of human an "informal", or home production Y h = BH' technology: sector is , where Hj* H = Jh l of human We di. role of l t t for , = i p,r, where r /3 specific, hence T 6 (0,1). by a in our analysis is to Post-tax income We t m where we have constraint therefore implies T = r AH m can be taxed. 3 capital used in market production, H t given by, is T > is t y\ = the transfer assume throughout that taxes and transfers and r are not indexed by t t linear indirect utility function the tax rate on income, and is t that the agent receives from the state. cannot be person B, so the market not taxable. is over net income, and a discount factor — T )Ah + T A> assume that home production All agents have identical preferences represented (1 home produc- capital used in than 100%, because while taxes can be imposed on the less home production sector, amount the The only always more productive. ensure an equilibrium tax rate market is + H™ = we have H^ Naturally, tion. l t t , i. The government budget used the fact that only human , The "masses" (A poor agents), endowed with a revolution though excluded from the political process, are initially Since they form the majority, they can overthrow technology. the existing government and take over the means of production, any period t > We 0. assume that poor only retain a fraction the previous analysis, nothing after a revolution). In particular, agent receives a per period return of total wealth in the economy between A agents. A whether fi t _i may be more = h fi attempted, is \x t we assume, if there AHj\ AH, and it always succeeds, but the is partially kept is a revolution at time t, This in all future periods. then each poor is of this fi t because the and share low value of y implies an ineffective revolution technology h and y /j or y} . The l = 0. We In particular, fact that \x by for simplicity, that the elite receive they capture a fraction of society in which the poor are unorganized). between two values: is of the output (the rest gets destroyed or fi t though in the elite, a revolution if the capital stock in i.e. assume that we have /zis Pr(// t = stochastic h fj, ) — (e.g. it a and changes q irrespective of fluctuates captures the notion that some periods conducive to social unrest, and also that a promise to redistribute today may not materialize due to changes in circumstances tomorrow. Finally, in each period the elite it is have to decide whether or not to extend the franchise. extended, the economy becomes a democracy, and sets the tax rate. We assume that if now the median voter, a If poor agent voting rights are extended, they cannot be rescinded. So the economy always remains a democracy. 4 3 We think of time t < as governed by a different model, for example with less inequality, so that there for all t < 0. redistribute by the elite, thus Tt — Tt = This is not to deny that in many countries coups happen. It is nevertheless true that once voting rights are extended and political parties are formed, it is relatively costly for any group to exclude the rest from was no threat of revolution and no need to 4 the political process. We discuss some reasons for this in Section 5 The timing of events within a period can 1. the state 2. the elite ji is be summarized as follows. revealed. decide whether or not to extend the franchise. If they decide not to extend If there the franchise they also set the tax rate. 3. the poor decide whether or not to initiate a revolution. share the remaining output. the tax rate 4. there the capital stock (a poor agent). allocated between market is a revolution they no revolution and the franchise has been extended, is by the median voter set is If is and home production and incomes are realized. Analysis 2.2 The analysis can be simplified by exploiting two features of the model. First, the capital allocation decision takes a simple form. capital to home best-response. It attention to r£ Second, use, thus is < player. Also, all 0. ( clear then that H™ = H f and members all m = if t , If If r t > f = ^p, then on the other hand r t all < agents allocate their f,then H™ = H no voter would ever choose r > f and we can , t is t a restrict which reduces the number of actions to be considered. of the elite have identical preferences, so we can poor agents have the same preferences, and when not to participate in a revolution, there is no "free-rider it treat them as one comes to whether or problem", because if an agent does not take part in the revolution, he can be excluded from the resulting redistribution. So, we can treat all poor agents as one player. Therefore, this a dynamic game between two In the text, gies only we players, the elite characterize the non-Markovian equilibria eral results. The Perfect Equilibria of this game, in which strate- formally, let a (elite in (fi, explicitly on time. Even though natural in this setting, for completeness, we disciiss Appendix, and show that they do not change our gen- state of the system consists of the current opportunity for revolution, represented by either r in the is as and the masses. depend on the current state of the world and not the focus on Markovian equilibria P=E Markov economy can be represented l \x or h fi , and the political state P) be the actions taken by the power) or D elite (democracy or when the state More elite control). is \x = pr or 1 p. , and (democracy). This consists of a decision to extend the franchise P = E, and a tax rate r when = (i.e. when franchise is not extended). Clearly, = 0, P remains at E, and if = 1, P switches to D forever. Similarly, p (p, P\4>,T r if are the actions of the poor which consist of a decision to initiate a revolution, p (p — 1 representing a revolution), and possibly a tax rate rp when the political state is P — D. 4> when (j> r <f) <r ) These actions are conditioned on the current actions of the elite who move before the poor agents according to the timing of events above. Then, a (Markov Perfect) equilibrium strategy combination, each other for We priate there all \i {a p (fi, P),a r r (fi,P\(j),T )} such that Bellman equations. Let us start a revolution (starting in state VP (R) — never occur). Clearly, and a are best-responses to V P (R) by defining h = (X fj, xn-% which is this game by writing the appro- we have rich lose everything, Next, suppose there > A 1/2) V (R) = the per-period return from revolution for and wants much as no allocative cost as long as r < lution, so in =p V>(pt, E) we would have ((i h Vp h (/j, ,E) a poor agent t as: E). is balanced, VP (D) = The h (fi T = (A — B)H. We t )H Bhy are in power elite and \[tp* = and r V r = (D) = and there = 0. ^jr-, can then write [^ )H . no threat of revo- is Therefore, the values of , = ,^, (5 [(1 - l q)V'(fi , E). Suppose that the . The + gV V, E)\ E) elite play revolution constraint is <fi (1) . = and r r equivalent = to: 0. Then, V P (R) > ,E). In words, without any redistribution and franchise extension, the masses prefer to initiate a revolution Assumption Revolution is 1 g more when That this constraint binds. fj, = /A To make the analysis interesting, we assume so that there is > $=£}. attractive for the masses sufficient Assumption when 1 wealth among the rich ensures inequality prefer revolution to the status outcome that is: inequality, hT /hp , is high so that they have more to gain by taking control of the means of production, and when A X)h r ). = Bhr+ { r f are given by: r, = Ah? + Finally, consider the state Vp , ov is redistribution as possible, because redistribution has any Markov Perfect Equilibrium, poor and rich agents, j median voter . 1 (fj, at the time of f Therefore, the equilibrium tax rate will be r the return to poor and rich agents state h constant over time). Also, since the is In this case, the and from the assumption that the budget Now, consider the \i 0. a democracy. is if since in the other state a revolution will the revolution matters, hence the per-period return T poor agents as the return to the infinite future discounted to the present (note that only the value of (since a and P. can characterize the Markov Perfect Equilibria of is is T p ct for the elite, is (recall total sufficiently wealth of the rich it. is low, (1 — high (and A low) that the poor quo with no redistribution. Since the revolution they will attempt to prevent is They can do this in is two the worst different ways. 0=1. they can extend the franchise, First, V P (D). under democracy, Second, the Then, the poor receive their return can choose to maintain elite V but redistribute through taxation: in this case, the poor obtain With the tax rate chosen by the rich. either action by the elite, political h p (fj, ,E,T the poor = power, r where r ) may T 0, is prefer still a revolution, thus: V*(jm\ E) Next, we = max {VP (R); 4>V P {D) + h E, t , (fj. t ) = (1 - r r )Ahp + t t AH + p [qVp In words, the rich redistribute to the poor, taxing — therefore receive net income (1 next period we are r T )Ahp from their in state still = \i h fi the next period the economy switches to V p (fi l > } . ) , all E, r T ) income own + - q)V p {fJ, E)] (1 at the rate t t capital and transfer . f, r < f, that then each is (rich) the elite (2) The poor T= = //', redistribution stops t t AH. an cannot tax themselves at a rate higher than f all in commit effective revolution threat. agent would privately prefer to put if and the poor receive ,E). This captures the discussion in the introduction that the elite cannot note that r r r then redistribution continues. However, , // h (fj, to future redistribution, unless the future also poses if 0)^\ E, r have: Vp If - (1 Also = ^p; their assets to the home sector, reducing aggregate tax revemies to zero. Before proceeding further, simplifies the exposition to restrict attention to the area of it the parameter space where democratization prevents a revolution, that is V P (D) > Vp (R). Thus, we assume: Assumption Next, Bhp + (A- B)H > 2 useful to calculate the it is extending the franchise, utility is clearly V p (fi h , ^f1 . maximum utility that can be given to the poor without E\q), as a function of the parameter achieved by setting r r = f in (2). q. This maximum Therefore, combining (1) and (2), we obtain: 0V, Now, is if Vp m h (iJL , E\q) = W. B, f ) < VP (R), = B* + (A then the -W-W -,X'- *><"-"> maximum transfer that can be made when (3) /j, not sufficient to ensure that the poor receive enough to prevent a revolution. clear that ?Y^) < Vp h (/j, VP (R) ,E\q = 1) = VP (D) > VP {R) by Assumption 1. Moreover, Vp by Assumption h (/j. , E\q) is 2, and Vp (fi h ,E\q = = h \i It is 0) = monotonically and continuously , increasing in Therefore, there exists a unique q* G q. V Finally, note that This (fi , E, r r ) because when there is in the h r hand is E of the elites, r decreasing in r is = a democracy, r and , f in =p whenever p (0,f] r such that (0, 1) = but r , , it is 1 (fj,' , = VP (R). E\q*) V greater than periods, whereas with the all h rr for all Vp when p = T (D). power From /J. this 5 discussion the following characterization of equilibrium follows immediately: Proposition Suppose Assumptions 1 and 2 1 Then, hold. for all q ^ there exists a q*, unique Markov Perfect Equilibrium such that: 1. If < q\ q then a r (fi ,E) l = = (cp 0),a r (p\ E) = (4> = <** 1,.)- h '(fi , E\<f> = = 0,t = f) and o*(jjl h D) = (r = f). r where f r G (0,f) 2. If ^ > g*, then a (p',£) = (0 = O,T = 0),a (p\ £) = (0 = 0,f r Also p (^,£;|0 = 0,t) = (p = 1) for all r < f defined by 1/ p (#) = V p (p'\ £, f = 0,r) (p = a p (p' 1), 1 , E\<f> = = = 0,r 1, .) (p , r r ) is ap r ct ). h (fi 1, .) ,E\(f) = ( The p = 0,t) = 0, r = = f) (p and = ^(/A D) = starts with the elite in power. 1 Now, strategy of initiating a revolution if the franchise > (r f is poor agent and sets the tax rate r if q < fi = h fi combination , in a = fi . = fi The poor play the optimal ft = p', when > q q*, the rich can prevent the once again they set r = and in the the unique (Markov Perfect) equilibrium of the game. even though the is elite face may this analysis: a lower future tax burden with redistribution than prefer to extend the franchise. This is because when q < q*, not sufficient to prevent a revolution. With q low, the revolution threat transitory, thus the and then when p , under democracy, they is game they set a tax rate, f r just enough to discourage revolution. This strategy is redistribution ,E\(j) p = p and the franchise has not been the new democracy the median voter is a In contrast, p p h There are three important conclusions to be drawn from First, (^ = is extended, in f. h simple way: recall that the then the rich set a zero tax rate q*, the state = the equilibrium path, off state switches to if cr v = f). revolution by redistributing. So in the state state and , can be expressed and extend the franchise when the And r 0) for all results of Proposition extended. , r poor realize that they transfers will cease. Redistribution will only receive transfers for when noncredible promise of future redistribution by the fj, = h fi elite. a short while can therefore be viewed as a Unconvinced by this promise, 5 When q ^ q* the equilibrium is no longer unique. In particular, there exists an equilibrium which takes the form in part 1 of the Proposition, and one which is similar to part 2. Also, in the Appendix, we , allow for non-Markovian strategies and find that even when q < q* , there exist with redistribution and no democratization, but there exists a cutoff q** unique equilibrium has franchise extension in the state (/j, h ,E). < subgame q* such that perfect equilibria when q < q**, the The the masses would attempt a revolution. revolution only prevented by franchise is extension. Second, perhaps paradoxically, a high value of q makes franchise extension A less likely. high q corresponds to an economy in which the masses are well organized, so they A 6 frequently pose a revolutionary threat. case, democratization is more However, likely. revolutionary threat, future redistributions Germany, which had the most developed may have been naive intuition this is become that in this not the case because with a frequent This result credible. may explain why socialist party, instituted the welfare state in the nineteenth century without franchise extension, while Britain and Prance extended the franchise. We Finally, return to this issue in Section 4. straightforward to see by comparing it is r increasing in the extent of inequality, h /h p V P (R) and A 3 Model of , E\q*) that q* more The role of inequality in detail in the next section. Growth and Inequality Dynamics The Environment 3.1 The previous section established when they can use why the elite may be forced to extend the franchise, even taxation and redistribution to reduce inequality. We now of the analysis to explore the implications of such political reform on growth To is This implies that higher inequality enlarges . the area of the parameter space where democratization occurs. franchise extension will be discussed in Vp (fi h simplify the analysis, The same continuum we alter the focus and inequality. consider a non-overlapping generations model with bequests. of agents as in the last section beget a single offspring. Technology now live for only one period and each identical to that in Section 2, but is human capital accumulates over time. This allows us to study how political transition interacts with the dynamics of inequality. We assume that all agents have identical preferences defined over their own consumption and "educational bequests" given 4+1 = (cj,ej +1 = ti'te, u for i — period r,p and 7 € t, and l e t+1 is Alternatively, v would have t > J by: (0, 1). ) ) Here (cj) c\ "7 1 -7 (e\ +i is y if e\ +1 ife\+l > 1 <\ the consumption of a member of group i alive in the investment in the offspring's education. These preferences imply a we could have assumed 0. 1 (ci) l fi > In this case, a high value of so that even in this state with the elite in power, l fi would 9 also lead to the same result. we constant savings rate equal to 7, and an indirect utility function which Both the consumption and bequest decisions are made as in the previous section. end of the individual's amount of bequest, The form life. = e\ +l income linear in is a minimum amount, he will leave of the utility function implies that there and when the agent cannot 1, afford this at the is nothing to his offspring. This non-convexity captures the feature that very poor agents will not be able to accumulate assets (see Galor and Zeira, 1993). The human offspring's capital given by: is =max{l;Zej + /} ^+1 where Z> and 1, also < (5 The presence indefinitely. investment, there The timing is a 1 which will (5) guarantee that accumulation does not continue of max{l;.} in (5) implies that even in the absence of any minimum amount of events within a period of human now would have. capital that each agent is: 1. education bequests are received. 2. the 3. the poor decide whether to initiate a revolution. decide whether or not to extend the franchise. elite there If is a revolution they share the remaining output of the economy. Otherwise, the political system decides the tax rate a poor median voter (i.e. 4. the capital stock if there democracy, and a rich agent is allocated between market is if not). and home production, and consumption and bequest decisions are made. Although the timing of events Now, there is no quite similar to Section is 2, there is a major difference. possibility of choosing redistribution to prevent a revolution, we are set after the revolution decision within the period. This implies that < attention in the case of q are focusing terms of the analysis of the previous section. Analysis 3.2 As noted above, the and q* in because taxes e\ +l = 0, if, preferences in (4) imply a constant savings rate: -)y\ < 1. So if an agent can afford he it, will Assumption The agent first 3 consume 7A < 1 all of it. and {^B) At 13 this stage Z> the minimum level of when we make the 7$, his income if 7$ > 1 proportion is below a following assumption: 1. part implies that in the case where there who has = will invest a fixed of his post tax income in the education of his offspring, but minimum, he e\ +l human 10 is capital, h\ no taxation (rt = 1, will leave = T% = 0), an no education to his offspring, thus = h lt+l accumulate while others do accumulation of is B< human Therefore, also. 1 The second so. capital takes place, A, a steady state level of human possible for is it some households not when part of the assumption guarantees that and even if the rate of return on than capital greater human to capital can be reached. This second 1 part will not only enable accumulation by the rich in the absence of taxation, but also ensure that taxation will never be severe enough to stop accumulation. In of our analysis, all we only consider initial conditions such that: hss where h rss >h r Q > (l A -l ) human the steady state value of the rich agents' is inequality ensures that we start with less than steady state be growth (rather than decumulation of human The second capital). The capital. first part of the capital, thus there will inequality ensures that rich agents are beyond the point of non-convexity, and are able to leave positive educational Once bequests to their offspring. different technology so that first no one accumulates and inequality Autocracy and Only the Rich Accumulate 1: control of the political system, rt = 3 implies h% Vt 1 > 0, = 0. < as governed by a stable. =Z T h t+l = Z (-yAhl) (e[+1 ) human . Z> 1 by Assumption Inequality in this poor: yl/yt =A A Case 2: also poor still r t _1 < (7^) capital dynamics for this 3, = ((jAf Z)^ ) h\. On the will also Then we rich on the group are given by: and A> B, we have hss > way to the steady state h\ i is 1- ratio of the rich to the increasing, so inequality income in this economy is: -i Autocracy and All Agents Accumulate Suppose h rQ > 0. The (6) Finally, the steady state level of aggregate + (1-A)(( 7 ^Z) T = then Assumption . economy can be measured by the income = Ah\/A = increasing too. also that h% elite in This dynamic equation has a unique steady state: h ss Since ('fBy Suppose we have the Since so that the poor are unable to accumulate. other hand will accumulate and the loo ss is t analyze accumulation and inequality in the absence of the threat of revolution. Case is of the periods Equilibrium Dynamics without the Threat of Revolution 3.3 We we think again, have: h{+1 = Z{^Ah\Y be able to accumulate. Thus h\ > converge to the same steady state, hss, given by 11 > hp > h$ (-fA)' 1 and , -1 for j = 1 Vt. This implies that both groups will (6). r and p. Since (jA) Since the poor start with less , the human capital and converge The steady same to the income state level of aggregate Therefore, this along this equilibrium path, inequality level, economy converges more equal to a = A UjAf Yg S given by: is Zj distribution of income The reason higher level of aggregate output than the previous case. is decreasing. 1_/ and > Yg S . also to a for this is that in Case a fraction of the agents were unable to accumulate, causing a poverty trap. 1, Case Democracy We now 3: We know = f = ^=^- consider the dynamics under democracy. maximum that in this case, the poor median voter will set the tax rate: rt . Accumulation dynamics are then determined by: = max jl, Z h{+1 for j T ht > = 1. r and The second p. (7 [Bh{ (A - + part of Assumption Z > (jB) 3, (7) ])^ ensures 1, to accumulate (7A) -1 when they Now receive transfers. may so that the poor If /iq > (jA)' 1 /i[ +1 > 1 if so that in the absence , would be able to accumulate, they of redistributive taxation the poor < t Therefore, taxation will not stop accumulation by the rich. This does not however guarantee that the poor will be able to accumulate. h,Q B)H consider the be able more involved case where Suppose h p not accumulate. will also = 1, then equation (7) implies that the capital of the rich converges to the steady-state level: D h ss It is = 1Z - [{A{\ straightforward to see that hgS A) is + XB) h°s + (A- strictly less Condition 1 than Yg S and Yg S 7 [B + (A - B) is tax return in this /if 1; thus Ygg and 1 h\ A) > 1 = on his human economy when /if = accumulation by the poor. level of income (human richer. When it is capital, 1 and h t =A X hss- + (1 — , Let also Ygg X)hg S which = hg S If it holds, at . Condition /i{j some point the = 1: he receives an after the total per-person transfer is 1 necessary and sufficient for is rich will have a high enough capital) so that redistributive taxation will enable the violated, there exists no k[ < hg S that to enable accumulation by the poor. 12 will note that the term in square this and the second term T < hgS the redistribution from taxation the post tax income of a poor household with B . consider: - X)h§s + = = poor to accumulate. To see sufficient to enable the brackets Now ((1 This condition states that when be . P uniquely defined and hg S denote the steady-state level of output when hp is B)X] will poor to grow generate enough tax revenue When Condition economy converges holds, the 1 accumulating to hss, so inequality when hand, to Y$ s with both the poor and the will also decrease as in the previous case. the poor do not accumulate, inequality, given by ^ ^ J to J ' ' % = — —— On the other —K— \j- (A-B)((l-A)/ir+A)+B Vt will increase despite the fact that there are also increased transfers to the poor. Also, Condition in holds, 1 it is also possible for the poor to start accumulating which case inequality this will fall monotonically. The necessary and rich from period -, ' when t = 0, sufficient condition for is: p 7 [Bh Condition 2 + {A which ensures that at time than (7) is greater 1, - B) t = thus 7^0 ((1 0, > - X)h r + Xh p )} > the after-tax income of the poor times the savings rate We can now summarize equilibrium be defined as useful to notice that 1. It is than Condition 2 because h 1 is less restrictive 1. < If h,Q < hg S whenever h^ < 1, Condition . in (6): controlled by the is T dynamics without the threat of revolution. Let hss Proposition 2 Suppose that Assumption system 1, (7/I) -1 elite. then h\ , = Then, we have r t 1 > V£ 0, E 3 holds, Hq = yA)~ l ,hss) and the / (( political and: h T monotonically converges to hss, aggregate t output converges to Yj 5 and inequality increases monotonically. 2. > (jA)' If h,Q 1 , output converges to YgS then both h\ and h r monotonically converge to h S s, aggregate t > Ys S and inequality decreases monotonically. Proposition 3 Suppose that Assumption system democratic. is 1. > If /to t (jA)~ l , output converges to Y§s 2. and If = 1 h,Q Vi > 4. If ho i, < and h /if 3. If h\ ho _1 (7^4) r such that h and decreases v t = _1 1 > YgS and inequality decreases monotonically. and Condition 2 and Condition holds, then inequality 1 fails 1 is is monotonically decreasing, is growing Vi > i. Aggregate output converges to no Kuznets curve: inequality is - to hold, then inequality increases monotonically, to holds and Condition 2 Vi G (0,f), and h\ thereafter. political t and h\ converges to h^s- Output converges (7v4) and the hss), , f and; There are a number of features to note. there -1 then both h v and h\ monotonically converge to h S s, aggregate {^A)~ l and Condition 0, < h rQ G ((jA) converge to hss, aggregate output converges to Yg S t < = Then we have r 3 holds, First, in the F55 fails < Y$g. to hold, then there exists Inequality is t Y^. absence of redistributive taxation, always increasing or decreasing. 13 increasing until A Kuznets curve is however possible with a democracy (Proposition sufficiently wealthy, the transfers from them to the poor But when the inequality will increase. become rich crucial threshold, the poor start accumulating, redistributive taxation Kuznets curve Section was 4, is key when the rich are not not ensure accumulation, and sufficiently wealthy, transfers reach and inequality Kuznets curve. societies did not start out as and there was no will arise for a larger set of franchise extension to an more for the will 4): falls. However, Thus a in this model, this configuration of the not totally compelling; as noted earlier and discussed in more detail in Western increasing, is Part 3, democratic and were not so when inequality redistributive taxation. We will see that the Kuznets curve parameter values when we add the possibility of revolution and economy with the elite in we power, and this believe is a much plausible explanation for the Kuznets curve. Second, inequality and especially the poverty of the masses are harmful to development. When the poor have h^ Y$ s whereas otherwise , Yg S . it > (jA) -1 may , the economy converges to the higher steady state get stuck in the lower steady state with per capita income This relation between inequality and prosperity applies both to a democracy and an autocracy. This result is a direct consequence of the nonconvexity in the accumulation technology as in Galor and Zeira (1993). Finally, in this lation model democracy is good for economic performance by the poor, but detrimental otherwise. In the absence condemns the economy much more stringent. On enables accumu- of democracy, /iq < than Yg S . So the impact of democracy on performance is -1 , the other hand, if democracy but the poor cannot accumulate, the economy converges to Yg S which less (jA) Yg S but with democracy, to the lower level of steady state output the conditions for "stagnation" are if it there is is even ambiguous. With some of the costs as emphasized by Alesina and Rodrik (1994) and Persson and Tabellini (1994), democracy would have an ambiguous effect even when enables the poor to accumulate. it Therefore, the empirical results that show no robust correlation between democracy and growth should not be too surprising. The Threat 3.4 We will now of Revolution analyze an economy which starts with the constraint never becomes binding of Proposition 2 will apply. rich If (e.g. if fi is elite in power. If the revolution very small), then the equilibrium dynamics on the other hand revolution becomes a real threat, the have to redistribute to the poor in order to prevent a revolution. However, given the timing we have assumed, a promise to redistribute 14 by the elite is not credible, thus would not prevent revolution. power to the poor, The only way becomes binding, the franchise is when general revolution constraint Ah\ > previous section: when AH /X. t to transfer political is the revolution constraint extended and the dynamics of Proposition 2 are replaced with those of Proposition 3 where the median voter The commitment credible extend the franchise. Therefore, to i.e. make a to But now a poor agent. is the rich are in power constant and h Q /h^ fi is same is the is changing over time. r as in the Therefore, the revolution constraint becomes: K < A(l-M) ^-Mi-A)When revolution constraint are: which is fairly intuitive. benefit of the revolution are fewer of falls. case, the stuck at 1: them with the same income = Condition 3 more is is less 2: inequality is decreasing, so Condition 4 inequality is it fails The Threat Condition 4 § is T h (i.e. is t — A)/i[) given), the return is serious (8); this is when a society has because the and when there from revolution more inequality segmented (A relatively low). When Only The Rich Accumulate In this on the way with the poor Thus we have: Condition 3 holds, the threat of revolution Case the less tight A, > ^m=av h ss rich accumulate. If the revolution constraint, is to Y§ s with increasing inequality will never bind. it points to note about this not binding at the point of steady state (which has maximal If (8) is 1. level of Revolution economy converges /if Two the tighter /z, is t. to takeover the wealth of the rich ((1 is The Threat at time is Second, the higher gap between h and h p ) and inequality), in the higher r Case If first, Therefore, the threat of revolution (a larger If be no revolution holds, there will (8) () (8) we can to hold, then of Revolution it is become will some point as the ignore the revolution constraint. When highest at time effective at t All Agents = 0. Then we Accumulate In this case, have: < ^g=$. satisfied, then there is lower after this point, there which both Conditions 3 and 4 hold from the accumulation process, themselves by force. If in at no revolutionary threat at time is never any threat of revolution. is of interest. In this case, some point they will if t = and since The configuration the poor are excluded want to redistribute resources to contrast they are also accumulating along the development path, they will not see revolution as a worthwhile activity. 15 As discussed above, when the revolution constraint binds, the elite have no choice but to extend the franchise. However, we have to ensure that the extension of the fran- The necessary condition chise generates sufficient redistribution to stave off a revolution. Assumption for this is related to — X)h1 + A/if] /A. The LHS and the RHS is Afi [(1 what he (A 2 in Section 2. what a poor agent is We gets with revolution. - B) ((1 (8) implies that h T t = A (A - /z) > are particularly interested in whether and the poor are not we combine the In this sxibsection, Then the critical From 1 at t Growth and Democratization Throughout we assume that the following result Suppose the economy — starts in is Case 1, elite start in and Conditions ) ~v, , /i(l-A)' the revolution constraint binds and the on the poor also start to accumulate, inequality converges to YgS and outline power immediate from our previous analysis: the rich accumulate and the poor do not. At threshold this point to impose: holds. The Kuznets Curve The Result we need analysis of the previous two subsections possible paths of development. and Assumption 3 ac- - //). Results: Implications For 3.5 some B{\ + A/if) + Bh\ > S[Z\) at this point. So to ensure that in this case franchise extension prevents a revolution, Condition5 X)h\ gets after redistributive taxation, this condition holds at the point the revolution constraint binds cumulating. Equation - t 1, 3 and 5 hold. inequality exceeds the elite falls extend the franchise. and aggregate output . In our view, this sequence of events corresponds to the experience of Britain, France, Sweden and Germany, where, as discussed in more detail in the next section, after a pe- riod of increased inequality accompanied by wars and depressions, the threat of revolution intensified. This forced the extension of the franchise and increased redistribution. As a result, inequality declined. section, we This case is the main focus of our analysis. In the rest of this outline alternative paths of development to contrast with the Kuznets curve. Autocratic Disaster Result 2 Suppose the economy starts in the rich start to accumulate at time t = Case 1, and Condition 3 does not hold. Then, and the poor do not. The revolution constraint never binds, the economy remains an autocracy with high inequality and converges to aggregate output Yg S . 16 This the path of an economy where is initial inequality is high, but nonetheless, the masses do not pose a revolutionary threat. This might be because the absence of a welldeveloped other factors imply that civil society or /j, is small (that hard time organizing, therefore a revolution would be very costly r high so that revolution became a not as beneficial at given h /h p is real threat, this economy could democratize, If \i for the poor will have a them), or because A is were large so that revolution redistribute to the poor, and reach Thus, contrary to conventional wisdom, political and social a higher level of income. instability . is, may sometimes be good for growth. In particular, whether a good "revolution technology" hinders or enhances growth depends on which case the economy is in. East Asian Miracle Result 3 Suppose the economy accumulate starting at time t = 0, starts in Case 2 and Condition 4 holds. Then, inequality declines binds. Aggregate output converges to Yg S all agents and the revolution constraint never . In this case, along the development path the poor segments of the society are sharing in the benefits of rising average per capita income, to create social unrest. and therefore do not find it This case reminds us of Taiwan and South Korea. worthwhile In the early post war period, both of these countries were in a situation very similar to that of the Philippines except that inequality was autocratic disaster). elite, 7 In much three, political all higher in the latter (as in the case of the power was concentrated in the hands of an not unlike nineteenth century Britain. In Britain per capita income and inequality grew and political transition took place. In the Philippines, aggregate income stagnated at a high level of inequality, and there was no political transition. In contrast to these cases, Taiwan and South Korea experienced fast somewhat. 9 Our model suggest that fell 7 The Gini coefficient was 0.34 in 1965 in growth but no democratization, 8 and inequality this may have been because the gains of growth South Korea and 0.31 in 1964 in Taiwan whereas it was 0.45 in Philippines in 1957 (see Fields, 1995). 8 A process of democratization is now occurring rather rapidly in the Philippines, South Korea and Taiwan. Nevertheless, for the purposes of the present study it is interesting to understand the prolonged undemocratic regimes in these countries as opposed to the experiences of much faster democratization in Britain and other developing countries such as India, Colombia and Turkey. It is also significant to note, for example, that in the thirty years prior to its democratization, 1960-90, per-capita GDP in Korea increased by a factor of 6.89. This was considerably faster than British growth during the nineteenth century. During the period 1820-1870, British income per-capita increased by a factor of 2.75 (all data from Maddison, 1995). This motivates our claim that South Korea and Taiwan have experienced a period of very rapid growth, but no democratization and no Kuznets curve. Section 5 discusses how a simple extension of our model can account for delayed, rather than no, democratization in South Korea and Taiwan. 9 for For example, the average Gini coefficient over the period 1965-1970 was 0.34 for South Korea and 0.32 Taiwan, and these averages fell to 0.33 and 0.30 respectively for the period 1981-1990, see Campos and 17 were equally divided between different social classes in South Korea and Taiwan, so the poor did not organize and the until much did not have to extend political power to wider groups elite later (see also the discussion in Rodrik, 1994; and Campos and Root, 1996; in support of such a view). Revolution Result 4 Suppose we are Case 1, the rich start to accumulate at time t binds at time i The main when > h^ in :^~^ , is = The revolution threat is that B is large relative to A. only a limited ability to tax the rich in a democracy, and place along the equilibrium path. to not. place. from the Kuznets curve profitable for the masses to take over the social unrest increased, and the poor do and a revolution takes difference of this case This implies that there Condition 3 holds but Condition 5 does not. Then means This case and attempts is to bring it is more of production. Thus, a revolution will take similar to pre-revolutionary Russia more moderate groups, such where as Mensheviks, power were unsuccessful. Historical Perspective 4 Our theory is motivated by historical evidence. Here we will provide an overview, empha- sizing the evidence in support of the following four features: 1. Inequality was increasing before, and decreasing after, the extension of the franchise. 2. The as a strategic 3. power before the franchise and extended the franchise elite controlled political move to avoid a revolution or at least very costly political unrest. Democratization was directly (redistribution) or indirectly (expanded education) a key factor in the reduction in inequality. 4. There are differences in social conditions which make some periods more conducive to social unrest, and there are also differences in the level of organization of the masses across countries which are important in determining political outcomes. Our most Germany 4.1 detailed evidence is from Britain, but evidence from Prance, Sweden and also supports our model. Inequality Britain Data on income inequality for the nineteenth century are not extremely reliable. However, a number of studies using different data sources on Britain reach the same conRoot (1996), Table 1.1. 18 elusion. Inequality increased substantially during the then started falling in the second This picture 1870. is 1 to be sometime is and after of Lindert not completely uncontroversial (see Feinstein, 1988). taken from Williamson's (1985) Table 4.2 gives a representative picture: Table 1 - British Income Inequality Share of the Top 10% Gini Coefficient 47.51 0.400 1830 49.95 0.451 1871 62.29 0.627 1891 57.50 0.550 1901 47.41 0.443 1911 36.43 0.328 1915 36.46 0.333 1823 A The turning point appears also consistent with the findings of Crafts (1989), (1986) on wealth inequality, but Table half. half of the nineteenth century, first similar pattern also emerges from earnings inequality data reported in Williamson (1985) Table 3.2 where the Gini coefficient increases from 0.293 in 1827 to 0.358 in 1851 and falls to 0.331 in 1901. Other Countries While tive survey, argues that In Germany again the data are sparse, Morrisson (1997) in his authorita- Germany, France and Sweden inequality rose during the nineteenth century peak around 1900. For example, Kuznets (1963) per cent went from declining to 31% 28% in 1873-1880 to in 1911-13. 1880, rising to 32.6% in 1900 inequality all fell Dumke and rapidly during the the income share of the top the Kuznets curve in 32% went through a Kuznets curve. and most researchers place the finds that the in 1891-1900, stayed at (1991) finds the falling to 30.6 % fallen Germany peaked 32% during 1901-1910, same income share to be in 1913. Following the First Weimar Republic. Kraus 5% had income share of the top 5 28.4% in World War (1981) records that by 1926 by 6.2%. Overall, Morrisson (1997) argues that in 1900, went flat and started to fall in the 1920's. For France, Morrisson (1991, 1997) argues that inequality rose until 1870, with the income share of the top 10 percent peaking at around 50%. However, inequality started to the 1870's, and in 1890 the income share of the top 10 percent was falling to grew in 36% by 1929. Finally, down to fall in 45%, further Soderberg (1987, 1991) records that income inequality Sweden, peaking just before the First World War, during the 1920's and then falling rapidly thereafter. 19 levelling off or falling slightly Franchise Extension and the Threat of Revolution 4.2 Britain In Britain, the franchise was extended (and later in 1919 and 1928 when women were in 1832, finally and then again allowed to vote). in 1867 and 1884 When introducing the electoral reform to the British parliament in 1831, the prime minister Earl Grey said "There than is am no-one more decided against annual parliaments, universal suffrage and the ballot, The I... Principal of my reform reforming to preserve, not to overthrow." reform is is to prevent the necessity of revolution... I am (quoted in Evans, 1983). This view of political shared by modern historians such as Briggs (1959) and Lee (1994). For instance, Darvall (1934) writes: "the major change of the was the reform of Parliament Whigs. ..as a measure to stave first three decades of the nineteenth century by the 1832 Reform Act, and off this was introduced by the any further threat of revolution by extending the franchise to the middle classes." In fact, the years preceding the electoral reform by unprecedented political unrest including the were characterized Luddite Riots from 1811-1816, the Spa Fields Riots of 1816, the Peterloo Massacre in 1819, and the Swing Riots of 1830 (see Stevenson, 1979, for an overview). The reforms that extended political power from a narrow elite to larger sections of the society were immediately viewed as a success not because of or democracy, but because the threat of revolution Lee, 1994). some ideal of enlightenment and further unrest were avoided (see Before the 1832 Reform Act, the total electorate stood at 478,000 out of a population of 24 million. Although the Act reduced the property and wealth restrictions on voting and increased the electorate to 813,000, the majority of British people could not vote. Moreover, the elite contained less still had considerable scope for patronage since 123 constituencies than 1,000 voters (the so-called "rotten-boroughs"), and there of serious corruption and intimidation of voters which was not halted is evidence in Britain until the Ballot Act of 1872 and the Corrupt and Illegal Practices Act of 1883 which introduced effective secret ballots at elections. The process of increased representation gained momentum with the Chartist movement during the 1830's and 1840's. Consistent with our approach, leading chartists saw increased way representation as the only growth (see Briggs, 1959). movement was again one to guarantee a more equitable distribution of the gains of In the meantime, the response of the elite to the Chartist of preventing further unrest. For example, during the 1850's Lord John Russell made several attempts to introduce franchise reform arguing that it was necessary to extend the franchise to the upper levels of the working classes as a means of preventing the revival of political radicalism (Lee, 1994). In discussing the lead up to the 20 1867 Reform Act, Lee argues that "as with the first Reform Act, the threat has been seen as a significant factor in forcing the pace; history was repeating interpretation is supported by many of violence itself." This other historians, for example Trevelyan (1937) and Cowling (1967). The Act was preceded by the founding of the National Reform Union in 1864 and the Reform League in 1865 and the Hyde Park riots of July 1866 provided the most immediate catalyst (see Harrison, 1965). As a result of these reforms, the total electorate was expanded from 1.4 million to 2.52 million and then doubled again by the Reform Act of 1884 and the Redistribution Act of 1885 removed many remaining inequalities in the distribution of seats (see Wright, 1970). Overall, in Britain the timing of franchise extension corresponds quite closely to the peak of the Kuznets curve. Other Countries Weimar Republic In Germany, democracy was established with the creation of the in 1919. There is no controversy amongst historians that the threat of social disorder and conflict following the defeat in the 1943; Abraham, 1986). IV coalition of "iron rural areas flat and to Gerschenkron, of Prussia revolution, had created a parliament, Germany was non-democratic controlled by Junker landlords rye" after the 1870's. by the landlords Even though, following the 1848 since 1900). The 1848 parliament was until 1919. (see was due This date corresponds to the downturn of the Kuznets curve (though inequality had been Frederick William War this and then by the Moreover, voting was oral and controlled in (see Gosnell, 1930 and Goldstein, 1983). In France, before the revolution of 1848 property restrictions limited the electorate to about 241,000, about 0.75% of the population (see Cole and Campbell, 1989). collapse of the regime led to a brief democratization which of Louis Napoleon in 1852. The real spur to The was cut short by the coup democracy was the defeat of the French armies in the Franco-Prussian war of 1870, which created the Third Republic and the Paris Commune of the following year. as Orleanist emerged in is and Legitimists victorious, this tried to suppress worker parties. is In 1877, the Republicans accepted to be the date for the establishment of democracy France (see Carstairs, 1980, Cole and Campbell, 1989, Elwitt, 1975). Once again, this approximately at the peak of the Kuznets curve. Finally, in til and This was followed by a seven year struggle for power Sweden, while universal male suffrage was introduced in 1907 it was not un- 1918 that true parliamentary government was introduced and the political power of the Conservative Party and the monarchy curtailed. 1918, the year where democracy became established, is once again at the peak of the Kuznets curve. Social unrest was again impor- tant in these reforms. The reform in 1907 had been preceded by 21 strikes and demonstrations. In 1918, social unrest was World War, the revohition more intense: while in Russia Sweden was not a participant and the situation in Germany in the First forced the concession of true democratic rights. Tilton (1974) records that in 1918 the Swedish Minister of army and navy characterized the sentiments of the is as "very revolutionary" and this War view supported by Verney (1957), Castles (1973) and the essays in Strth (1988). 4.3 Redistribution Britain The Reform Acts of the 1867-1884 were a turning point state. In 1871 Gladstone reformed the civil service, opening it in the history of the British and to public examination Liberal and Conservative governments introduced a considerable making it amount of labor market legislation fundamentally changing the nature of industrial rela- meritocratic. tions in favor of workers. During 1906-1914, the Liberal Party under the leadership of Asquith and Lloyd George introduced the modern redistributive state into Britain, including health and unemployment insurance, government financed pensions, minimum wages, and a commitment to redistributive taxation. As a result of these fiscal changes, taxes more than doubled as a proportion of National Product and then doubled again. In the meantime, taxation also in the 30 years following 1870 became highly progressive Lindert, 1989). Consistent with these trends, Lindert (1994) has recently ables measuring democracy, in particular voter turnout, had a shown that (see vari- significant positive effect on the expansion of government expenditures on social programs (welfare and unemployment compensation, pensions, health care and housing subsidies) in the period from 1880-1930, again supporting the interpretation that democratization has been a key driving force of the radical shift towards redistributive fiscal and social policy. Meanwhile the education system which was only open to the elite during most of the nineteenth century became more and more open to the masses (see Schofield, 1973 and Mitch, 1992). First, school leaving 1899 and special provisions age was set at 11 in 1893, then increased to 12 in for the children of needy families were introduced. Finally, the reform act of 1902 introduced public schooling as a duty of the government towards its people. As a result of these changes, the proportion of 10-year olds enrolled in school which stood at a disappointing 40% p. 207). Many in 1870, increased to in 1900 (see Ringer, 1979, educational historians argue that the democratization of British society was the key driving force behind these changes (e.g. Simon, 1960). Williamson (1985) sees the increase in the supply of in inequality. 100% skills as the key reason for the fall Therefore, to the extent that mass schooling contributed to this increase, 22 the education policies were a key factor in reducing inequality. Lindert and Williamson (1985) "the rate of This is summed up by deepening reached impressive skill levels in the era following the educational reforms of the 1870's, coinciding with the drop Britain's Kuznets Curve." Moreover, the data already reported down in the previous subsection suggests that the reduction in income inequality was faster than the compression in earnings inequality which is consistent with the view that increased and more progressive taxation played a key role in reducing inequality. Other Countries In Germany, during the period where the Kuznets curve peaked, primary school enrollments were by the creation of a welfare state and Baldwin, 1990). standards While this by Bismarck is which began well known, social conflict in the early 1880's (see was met Tampke, 1981; was a small amount of redistribution by contemporary seems to have been enough to stop the it in inequality initiated 10 However, as flat. rise in inequality. Moreover, the fall in the 1920's coincides with the large increase in redistribution by the Weimar state (see Flora, 1983). In France, as in Britain, coincided with important educational reforms 11 . democratization In 1881 the government abolished fees in public primary schools, and in 1882, 7-year compulsory education was introduced. primary enrollment rate increased from 66% in 1863 to 82% in 1886. The Moreover, central GDP increased by one third from 9.4% in 1872 12.4 % in 1880 (Flora, 1983). For Sweden, as for government expenditure as a percentage of (a figure itself inflated Germany, there was by the war) to little impact of democratization on educational enrollments, however, Lindert's (1994) data shows that before 1920 there while after this date 4.4 An jumped up at all in Sweden, sharply. Revolution Opportunities important part in the timing of as indicated 10 it was no redistribution political reform was played by increased inequality by the coincidence of democratization with the peak of the Kuznets curve. which has received much recent attention in the context Campos and Root, 1996). Whether or not land reform is attractive to the elite, and acceptable to citizens depends on where revolutionary threats come from. Typically it is urban workers who pose the biggest threat to regimes, and they were the target of Bismarck's reforms, not rural peasants. In Germany the proportion of the labor force in agriculture in 1870 was around 45% (see Flora, 1983) while for Britain it was already down to 20% by this date (Michell, 1962). In South Another possible method of of the "East Asian Miracle", is redistribution, land reform (see was around 80%. from the historical experience of the world's 25 largest nations, ..., a major commitment to mass education is frequently symptomatic of a major shift in political power and associated ideology in a direction conducive to greater upward mobility for a wider segment of the Korea and Taiwan u Easterlin this percentage (1981) notes: "to judge population." 23 Equally important in determining the timing of the extension of franchise were economic depressions and wars. In Britain, the move towards democracy a sharp business cycle downturn (Lee, 1994). slump (widely recognized into a prolonged to was spurred by in 1867 Also after 1873, the world economy went be the worst of the nineteenth century), which caused increasing distress over the next decade. In France, the Franco-Prussian war was Commune and of crucial importance in leading to social unrest, to the Paris War appears In Sweden, the end of the First World Third Republic. And the revolutionary sentiment (Verney, 1957, and Castles, 1973). War was the defeat in the First World to to the have increased finally, in Germany, instrumental in creating social unrest and to the founding of the Weimar Republic. Social unrest was in (a point stressed Germany was by predicts that Germany during as strong in the mid nineteenth century as and France. However, while there were no strong in Britain and France was certainly by Stephens, 1989, elite should have had more by promising future redistribution. This socialist parties in Britain example), the Social Democratic Party party in Europe at that time. far the largest left-wing German for democratization in Britain and France, in Germany the first without a real transfer of political power to the working classes. Our model then dealing with social unrest flexibility in While there was consistent with the facts. is it welfare state was instituted, Extensions 5 In this section we will informally discuss which are relevant for the Among Heterogeneity there is case, H = model of Section 3. the Rich a distribution of asset levels, A/if t except that + now (1 — A) / hdG the tax rate suppose that Gt(h) is t some {h). G t {h) The may be skewed to the It is extensions, focusing especially on those 12 straightforward to extend the model so that among the rich, with lower support h rest of our setup positive even and results when the right. In this case, the elite median > 1. In this remain unchanged, are in power. rich agent would First, like a zero tax rate, and none of our results need to be modified. In particular, given decreasing human returns to However, if G t (h) capital, all rich agents converge to the is skewed to the left, same G t (h) is sufficiently skewed, human then this tax may be or not depends on We are grateful to the referees for bringing out some 24 this tax rate. high enough to ensure accumulation by the poor and avoid the revolution constraint. The interesting feature 12 capital, hss- then the median rich will set a positive tax rate. Now, whether the revolution constraint becomes binding If level of is that in this case of the issues discussed in this section. amount the of conflict among the elite has an impact on the conflict between the elite and the poor. Among Imperfect Substitution and the poor supplying unskilled rich agents supplying skilled labor substitution between these two types of labor. For example: Y = In this case, differences in A would have another, perhaps more When likelihood of revolution. would translate A income Costs of Redistributive Taxation see that income if this level is make our be without this inequality . A(Xh^) a ((l — A)h[) 1-Q . on the intuitive, effect point in the simplest model, distortions. It relaxed, then a democratic society Yg S < Yg S Whether labor, with imperfect inequality. In order to redistributive taxation to assumption t can think of the high, unskilled wages will be depressed so a given h Tt /h pt is into a higher level of we have assumed We the Rich and the Poor is strict or is straightforward to would actually tend to an not will depend on a number of other features which are not crucial for our story but would strengthen the conclusion that the lack of robust correlation between democracy and growth Targeted Taxes and Transfers We have so far may not allowed the transfer lump-sum taxes used want to use their political Laws or light). power Combination Acts which outlawed unions However, in doing this when to subsidize production, the elite, to redistribute in their favor (one to be specific would can interpret the Corn in the nineteenth century Britain in this they have to respect the revolution constraint again: a high this case the elite will often tax the power and may is that in masses just enough to make them indifferent between the existing system and a revolution. elite is in t in power, tax on the poor would make a revolution worthwhile. The interesting implication when the T With person negative or person specific, so the elite preferred no intervention. transfers or not be surprising. fit This case makes increasing inequality more likely the example of some African cases where state power appears to have been used more often to redistribute from one group to another. Why is Democracy Irreversible? franchise they cannot rescind it. coups which have restricted the the question of why This is We have assumed that once the elite clearly unrealistic, since there are political participation of the masses. extend the examples of This issue also raises the poor are initially excluded from the political process. Part of the answer appears to be that political power depends on wealth. The elite initially are much wealthier than the masses, and can use their wealth in order to control the political process. Once the and franchise is extended, the distribution of income and wealth becomes more equal, this implies that the process, and a return masses now possess the resources to take part in the political to autocracy becomes much harder. 25 We could easily introduce this in our model by making /x a function of the income level of the poor, for example, n(y p ) (with p the restriction that ) fj.(y < p, so that democracies do not necessarily lead to a revolution). In this case, once the franchise organized, so even if inequality is extended and yp increases, the poor are much better falls, the threat of revolution does not totally disappear. This reasoning also suggests a reason why South Korea and Taiwan may have Our simple model the democratization process over the past ten years. should remain an autocracy forever. some point to income, at ji However, With predicts that they of political will increase sufficiently so that the elite franchise, despite the low level of inequality. that, as in the case of we think if this modification, power become our approach predicts South Korea and Taiwan, economies which start with relatively low sufficiently wealthy, social unrest Forward Looking 2), as related have to extend the inequality should experience high growth and no democratization for a while the masses started and then once should force democratization. Elites Finally, in the model of Section 3 (as opposed to Section the agents are "myopic" because they live only one period and do not care about the dynamics after they die. If we introduce more general kinds of altruism or long horizons for the agents this aspect will change. In this case, accumulate slower than otherwise the members A(l — some fj)/fi, of the elite may one might conjecture that the realize that H* However, than . they collectively have assets worth if the important point to note kind of coordination from the "state" he would ignore his may in order not to hit the revolution constraint. Intuitively, the revolution threat will become active. So they level less elite If . member each impact on the aggregate stock of accumulating more. Such behavior by all the may is of the elite stop accumulation at that this requires is some deciding individually, and thus would assets, H* = "free-ride" members would take the economy by to H*. Concluding Remarks 6 This paper has offered a simple model of political transition and reform, and investigated the implications for the dynamics of growth and inequality. this paper are: (1) it explains why the rich elite may want the fact that this implies higher taxation in the future; (2) The two main contributions of to extend the franchise, despite it offers a new explanation for the presence of a Kuznets curve in the development experience of Western societies, which appears to accord well with the data. The emphasis equilibria in this may have paper on political reform as a way of changing future political a number of other applications. of franchise extension in our model is that it 26 changes Recall that the important feature who the median voter will be in the future, and thus commits the elite to future redistribution. and future political balances. For example, electoral systems institutions influence political equilibria, policies. Also, programs differ in countries, entitlement of whether there was a commitment motive issues when it is difficult commitments as to certain This raises the question these programs were instituted. treated satisfactorily in this paper. First of although Britain, Germany, France and Sweden U.S. relations with international difficult to cut. in play we have not affect can be reversed. For example, in most easily they programs appear to be very There are a number of all, how and thus may act Other reforms also fit our story, the U.S. does not. In the to get a picture of the extent of suffrage because of a plethora of state level restrictions (on the basis of wealth, property ownership, race etc., see Williamson, 1960; Crotty, 1977). Nevertheless, the best guess seems to be that by the 1850's, around 50% Such a of adult white males could vote. The was sufficient to generate Inequality, however, increased until substantial redistribution in other countries. 1930 and then started declining. level of suffrage downturn of the Kuznets curve fact that the again related to increased redistribution, which followed the Great Depression, aging for our theory, but easy to determine. We why around is encour- is redistribution started 80 years after democratization number conjecture, together with a once is not of historians, that the U.S. was exceptional, especially due to high levels of immigration. Historical sociologists such as Kaelble (1986b) argue that U.S. citizens saw themselves as very upwardly mobile, partly because the lower ranks of the society were taken by migrants. This may have changed in the late 1920s with the depression (and the fact that immigration was severely curtailed in the 1920's). fit Even though these arguments may the U.S., more research more likely when general, when inequality is is inequality required. is justify why our simple model does not Second, our model predicts that democratization however ignores another important high. This effect. In who will be taxed more heavily. This implies that the impact of inequality on democratization will be is high, democratization determined by the interplay of two offsetting is forces. to use a "repression" strategy, such an extension American and African quite damaging Third, may be countries. Finally, there are major to the elite we have not allowed the relevant for a number differences in the elite of Latin form of redis- tribution across countries. In Britain, education increased substantially after the franchise due to increased government support. In contrast, via the welfare state. and whether the same It is in Germany, early redistribution was important to understand what might cause these differences, forces are also important in shaping the differences in the extent and form of redistribution we observe today. 27 Appendix 7 We now More analyze the model of Section 2 without the restriction to Markovian strategies. we look specifically, for cutoff probability of state p h subgame < q** , such that when q q* We perfect equilibria. > will find that there exists q**, there will be redistribution without democratization which prevents a revolution. In contrast when q when p = p equilibrium will feature the extension of the franchise note that First, V ends with P a (p h ,E\.,.) 1 E\., , elite are .) game = = (p at time = = 1,.) (p t without a revolution. 13 Next, note that after 0). to their minimum = only 1) payoff, since r if = (f> t = f in VP (R) > V P (D). and ignoring revolution, the 1, all perfect equilibrium, irrespective of the history of the game up to this point. and r 0, by the masses other than V p (p k r , , E\(f> when they = 0, cr p (p , E\(f> will play = p Suppose q 1 < play p t 2 ensures that this inh p (p , = E\(p Now ). = 0. ps =p f) elite in state h where f < r f. and T (p s ) > f (p all = 0) of the p t 1 if = 1 if and only V P (R) > V p (p h t , if E\<f> VP (R) > V p = 0, h (p, at time elite: t. = h al(p ,E) p}, for all s E\<p = 0, = rr ) r r ). t Markov be the tax rate ) Consider the following candidate equilibrium = = = (<j> t For the masses, a (pj ,E\(j)t ps , that in this case, there were no 1 P if = Then, in any subgame perfect equilibrium, a P (p ,E\4> Recall from Proposition strategy combination. For the = = consider this. T 0,t[ .) So we have pinned down r Perfect Equilibria with redistribution and no democratization. Let T (p chosen by the 1, h with probability q*. 0,r cr Therefore, t t ) be the continuation payoff of the masses, conditional on t t ) will only put positive probability on p and = h future periods. Assumption subgame Let then effectively the game t, This immediately implies that equality never holds, thus in any strategies . t down aP (n h ,E\(j) the only q**, = p AH/X(l — (3), Therefore, in any subgame perfect equilibrium, = (p = 1) only if V P (R) > V p where V p is the payoff of the masses in P (R) the continuation of (fjL < h t the masses initiate a revolution at time if a < t, and (p = = f) and al(p ,E) = T 0,r[) = (p = 0) if T (p > f if = 1) otherwise. Then, the payoffs 0,r r l (<fi t £ s) in this candidate equilibrium are given by: Vj (ph V j {p for j , l , h E) = (l- r)Ah j + tAH + [qVj (p E) = (l- [qVj {p f)Ah? = p and r. Now define f + TAH + such that V p (p h , E) , h , E) + (l- q)V E) + (l- q)V — V P (R). f < We to time , l (p , E)] (9) E)] (10) all 2. subgames. Next, we now using <Tj instead of er, which stands for a conditional on the public history of the game up The public history includes all past actions (but not mixing probabilities when these are used). are t. J l (p r exists by Assumption Therefore, the above strategies are best response for the masses in 13 j 28 need to check whether they are best response h tax rate in state 0,t[ for the elite. Clearly, if the ,E), this will immediately cause a revolution, thus (fx elite reduce the = h T a (n ,E) t ((f) t = = f) is optimal conditional on the history up to time t characterized by r r (fi > f = n h and T r ([i > f if — ji for all s < t. In contrast, if the elite deviate from = 0, t[ = 0), this will not cause a revolution = 0, r r = f) to er[(//', E) = E) = s) l if fi s (?l(fA ((f> t , immediately. elite cr ', (ii t E) , = E\(fi t ((f) t only do so h T can play , f It will always a v (\i h The fi s s) l 1, = = when the state changes to h (fx But ,E). in this case, the = 1) and as we saw above, the best-response of the masses is (p = 0) irrespective of the history of the game up to this point. ((fit .) payoff to the elite from following this deviant strategy starting in the state (n ,E) l V3V , E) = Ah r +P r [qV (D) + (1 - l q)VJ(fi , E) Therefore, the above candidate equilibrium strategy combination equilibrium and only if if V r (^f,E) given by (9) and (10) is is: is a subgame perfect greater than or equal to P) = ^-ffi-q) lt is straightforward that if q = q* V r (^i\E) > VJ(/i ,E) and r r at q = 0, V (fi ,E) < VJ(fJ,E). Also, V (fi ,E) falls faster in q than Vj(ti ,E). 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